For lawyers interested in the long standing debate about the role (what role?) of good faith in commercial contracts, Monde Petroleum provides some guidance.
The facts can be taken briefly. Monde is a BVI company run by a Mr Al-Fekaiki (F). Westernzagros (WZL) was a Cypriot company. In 2006, WZL was negotiating with the Kurdistan administration to explore for oil and develop production in Kurdistan, and it was hoped to conclude an exploration and production sharing agreement (EPSA). Although such an agreement was indeed concluded, it was never formally ratified by the regional government in Kurdistan. Monde reached an agreement with WZL for consulting services to be provided by F to WZL in return for fees and, in the event of the achievement of certain milestones, success fees and, ultimately, an option to acquire an interest in the EPSA (the CSA).
By 2007, the regional government had secured reductions in the benefits WZL would get from the EPSA and, in March of that year, WZL sought to bring the CSA to an end by serving a termination notice; this led to the execution of a termination agreement. It was common ground that the option conditions had not been satisfied.
Monde sought to set aside the termination agreement, claiming that its signature thereto had been obtained by threats by WZL (to withhold payments said to be already due under the CSA) and misrepresentations (that if Monde signed the termination agreement, WZL would enter into a new agreement giving Monde participation rights in oil exploration and production in Kurdistan). At trial, WZL abandoned the duress claim and lost the misrepresentation claim. It further argued that Monde had no rights of any value under the CSA.
Submission that termination provisions should not be exercised in bad faith
The good faith issue arose because Monde contended that the termination provisions contained in the CSA were subject to an implied term that they should not be exercised in bad faith or in an unconscionable manner, intending to deprive Monde of its remuneration under the CSA and its potential future profit share under the EPSA option.
The starting point for the discussion was the decision of the Supreme Court in British Telecommunications plc v Telefonica O2 UK Ltd, in which Lord Sumption referred to the established principle that the exercise of a contractual discretion was a matter requiring good faith and due regard to the contractual purpose for which the discretion was provided. Monde argued that this principle extended to the exercise of a right to terminate a contract: it could not be right that WZL could bring the contract to an end when Monde had done most of its work but not yet reaped its reward.
Counsel for Monde referred to the MSC Mediterranean v Cottonex Anstalt first instance decision, in which Leggatt J had said that, when one party to a contract has a decision to make which affects the interests of the other party whose interests were not the same, this gives rise to proper concern that the decision-making power should not be abused, and is a reason to require a measure of constraint on the decision-maker’s ability to act purely in his own interests.
WZL submitted that the implication of a duty to act in good faith had to satisfy the general test for the implication of contractual terms set out in Marks & Spencer plc v Paribas; accordingly the implication had to be necessary or obvious. Since there is no general doctrine of good faith in English contract law, absent the limited categories of contract where it is established that such a duty exists (eg contracts of partnership), such terms would only be implied if the contract would lack commercial or practical coherence without it. Even the fact that a contract might be intended to be a long term relationship would not be sufficient.
Development of a concept of good faith?
Leggatt J appeared to encourage the development of a concept of good faith in contracts in Yam Seng Pte Ltd v International Trade Corp and the MSC Mediterranean first instance decision, but in Hamsard v Boots UK Limited, Norris J refused to follow that lead, even in joint venture contracts.
Following the Monde decision, the Court of Appeal ruled on the MSC Mediterranean appeal. The Vice President of the Court of Appeal, Moore-Bick LJ, giving the judgment of the court, strongly discouraged the Leggatt approach, stating that the English courts would continue to prefer to develop “piecemeal solutions” to problems of unfairness in contractual relations.
Step towards more traditional thinking
The ruling in Monde Petroleum, and the MSC Mediterranean appeal ruling, take a firm step back towards the more traditional thinking on good faith terms. Interestingly, the judge in Monde pointed out that even in cases where there might be good arguments for seeking to imply a good faith term, there would still be a right to exercise a contractual right to terminate a contract entirely as a party pleased, provided that the contractual conditions for doing so were present; in so holding he followed the Court of Appeal’s decision in Lomas v JB Firth Rixon. A contractual right to terminate is different from a discretion, being a binary decision rather than one involving a range of ways forward. Where there is a range of options and they all affect the other party’s interests, the power to select between them should not be abused. On the other hand, the right to end a joint contractual endeavour is clearly a right to be exercised as a party sees fit in his own interests. Leggatt J is looking like a bit of a lone voice.
On the facts of Monde, WZL had not exercised the right to terminate in accordance with the contractual conditions for doing so, some of which had not arisen, and such wrongs as WZL was found to have committed had not caused Monde any recoverable loss.
